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Old 01-28-2004, 07:13 AM   #1
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Join Date: Apr 26, 2003
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Default From the WSJ: Sirius Deals Aim To Get Radios In Sold...

The WSJ had this article regarding the latest activity at SIRI:

Sirius Deals Aim To Get Radios In Sold, Leased Vehicles



PHILADELPHIA -- Sirius Satellite Radio Inc. (SIRI) announced agreements Tuesday aimed at putting Sirius radios in trucks and cars sold and leased by companies tied to Penske Corp.

Auto dealership owners UnitedAuto Group Inc. (UAG) and Penske Automotive Group have agreed to order Sirius satellite radios with vehicles they buy from automakers, where available, and to make best efforts to include a subscription to the Sirius service when they sell or lease the cars.

The two companies own and operate about 144 auto dealerships in the U.S. UnitedAuto Group Chief Executive and Chairman Roger Penske holds the same titles at privately held Penske Corp., a transportation company with interests in publicly traded UnitedAuto and other businesses.

Penske Truck Leasing, the largest truck leasing and rental company in the U.S., where Roger Penske serves as chairman, agreed to order Sirius radios with new trucks it purchases, where available, and to install the radios in a select number of trucks it leases to consumers.

The Penske companies plan to launch an extensive joint marketing effort with Sirius, the radio company said.

In return, Sirius agreed to pay the Penske companies a commission upon the sale or lease of a vehicle that includes at least a one-year subscription to the Sirius service bundled with the price of the vehicle, and to share joint-marketing costs.

Sirius also plans to reimburse the Penske companies for certain costs of purchasing and installing the radios, and will issue the Penske companies warrants to purchase 38 million shares of Sirius common stock at an exercise price of $2.393 a share.

Two million of the warrants vested upon execution of the agreements and the rest will vest over time based on achievement of certain milestones by the Penske companies, Sirius said in a filing with the Securities and Exchange Commission.

Sirius shares closed Tuesday at $2.97, down 9 cents, or 2.9%. Volume was 71.4 million, compared with average daily volume of 67.9 million shares.

The filing didn't specify how the warrants might be divvied up among Penske companies. Spokesmen for Sirius didn't immediately return calls for comment. A UnitedAuto spokesman referred a question about the warrants to Sirius.

Under a five-year agreement, vehicles ordered by UnitedAuto's 138 U.S. franchises will come with factory-installed Sirius radios, including a three-month free sample of 16 streams of programming, a press release said.

The radios that Penske Truck Leasing and Penske Automotive Group order also will be pre-activated with a sampling of programming for a complimentary period.

Sirius offers commercial-free music and sports programming to cars and homes.

Janco Partners analyst April Horace called the agreements "a valuable way to help drive a grassroots campaign at the dealership level, because once the dealers start pulling the product and buying into it, it helps the distribution significantly. ... I think what this helps do is kind of jump-start the dealers ordering the vehicles with the radio factory-installed."

However, it's unclear how many radios and subscriptions will be sold as a result of the deals, so it's difficult to determine the actual value of the deal to Sirius, she said.

"I think we would have preferred to have a little more visibility into this deal," she said.

The warrants being issued in connection with the deals shouldn't be very dilutive to holders of Sirius, which has some 1.4 billion shares outstanding, she said. But the warrants could be worth $78 million on a Black-Sholes basis, she said. Black-Sholes is a model for gauging the value of options contracts.

Horace doesn't own Sirius shares. Janco makes a market in Sirius shares but hasn't performed investment-banking services for the company over the past year and has no plans to provide such services in the next three months. Horace rates the shares at accumulate.

Sanders Morris Harris analyst Steve Mather called the deals interesting but said they don't change his near-term thesis - that the company faces some challenges before ramping up subscriber growth at a more rapid rate - or his long-term thesis that people have already demonstrated they will pay for radio.

"This is just the natural evolution of this sector," he said. Mather wasn't concerned that the warrants will be dilutive.

Mather rates the shares at hold, doesn't own them and said his firm has no investment-banking relationship with Sirius. Sanders Morris Harris makes a market in Sirius shares.

Sirius reports fourth-quarter earnings on Wednesday.

In a note Monday, Mather wrote that Sirius' product portfolio is expanding, automakers are inching toward more factory installs, revenue and subscriptions are rising, and subscriber-acquisition cost is declining - but all at too-slow rates.

Development of next-generation products will be the catalyst to spark significant factory installations and improved competitiveness at the retail level, his note said.

Janco's Horace said she will focus on subscriber-acquisition costs when listening to Sirius' fourth-quarter conference call.

-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285;
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